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South Sudan may face fiscal collapse by July, leaked report says

May 9, 2012 | 3:08
pm

This post has been updated. See the note below for details.

South Sudan could run out of reserves and possibly face "state collapse" as soon as July after shutting off its oil, according to a confidential report leaked to news media that appears to be from the World Bank.

The March memo, first reported and later released by the Sudan Tribune, paints a dire picture of the economic crisis ahead for South Sudan, the world's newest country.

The fledgling nation shut off its oil wells in January in a dispute with Sudan, saying that it wasn’t getting its fair share of the wealth. The two sides had sparred over the transit fees that Sudan charges to get the oil to market, with South Sudan accusing Sudan of stealing "enormous volumes" of its oil.

Border hostilities between South Sudan and Sudan, which fought a 22-year independence war, have recently threatened to add United Nations sanctions to their economic woes.

Though it would not directly answer questions about the authenticity of the memo, the World Bank said it had recently assessed the economic situation of South Sudan at its request and was "deeply concerned" about the effect of the oil dispute on both countries, "particularly the most vulnerable."

The leaked memo recounts a briefing to the United States, Britain and other "key donors" by World Bank official Marcelo Giugale. According to the memo, Giugale called the shutoff "shocking" and told donors that "the World Bank has never seen a situation as dramatic as the one faced by South Sudan."

If the government holds fast to the spending plan it adopted this year, South Sudan will run out of reserves by July, "at which point state collapse becomes a real possibility," the memo said.

If it slashed spending by more than half, it would still run out of funds in less than a year, the memo said. The repercussions would be rapid and dire, with poverty likely to soar from 51% of the population up to 83%, the memo said.

The memo also quotes Giugale as saying South Sudanese officials were being unrealistic about alternative sources of income, relying on plans that might actually end up damaging the economy. It criticized South Sudanese leaders for failing to understand the consequences of their decision.

[Updated May 9, 4:13 p.m.: The governor of the Central Bank of South Sudan, Kornelio Koriom, told Radio Miraya in South Sudan that there was no danger of financial collapse, calling its economy "one of the best in the region because it is being backed up by resources which are not yet tapped."]

The idea that South Sudan soon could face an economic meltdown is hardly surprising. Oil money made up all but a sliver of the South Sudanese budget before the shutoff. The country plans to build an alternative pipeline, but that probably would take years and cost billions.

"They have lost almost all their revenues at a time they need all the revenues they can get," said Anne W. Kamau, a Brookings Institution research fellow studying growth in Africa. "You cannot build with that kind of mentality. Managing an economy is totally different than a war."

But some experts questioned whether the leaked report was exaggerating the problems or misplacing the blame. Oil profit was already lagging before the shutoff as Sudan seized South Sudanese ships, said Andrew Natsios, a Georgetown University professor of diplomacy.

Many people in South Sudan are unlikely to suffer from the shutoff because they only recently began to benefit from the oil, said Jason Hickel, an assistant professor at the London School of Economics. Rural herders and farmers are not likely to make the run for dollars imagined in the leaked memo. And pumping up other industries, while unlikely to save them in the short term, is a needed step, he said.

"These grand effects seem exaggerated," Hickel said. "There’s something concerning about this very powerful institution telling a country that it has to export its oil."

Photo: A Sudanese repair crew works at the Heglig oil facility, after Sudan started pumping oil again from the war-damaged oil field on May 2, 12 days after South Sudanese troops who had seized the oil field left the area. Credit: AFP/Getty Images